Securities and Exchange Commission v. McGinn, Smith & Co, Inc. et al

Filing 647

MEMORANDUM DECISION and ORDER re 604 Status Report filed by William J Brown. It is ORDERED that the Receiver may proceed with the sale of the Sacandaga Lake Property pursuant to the report filed with the court (Dkt. No. 604). Signed by Magistrate Judge Christian F. Hummel on 11/22/2013. (lah)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.

No. 10-CV-457
(GLS/CFH)

McGINN, SMITH & CO., INC., et al.,
Defendants.

APPEARANCES:

OF COUNSEL:

PHILLIPS LYTLE, LLP
Attorneys for Receiver
Omni Plaza
30 South Pearl Street
Albany, New York 12207

WILLIAM J. BROWN, ESQ.

UNITED STATES SECURITIES &
EXCHANGE COMMISSION
Attorney for Plaintiff
Room 400
3 World Financial Center
New York, New York 10281

KEVIN McGRATH, ESQ.

LINNAN & FALLON, LLP
Attorney for Defendant Trust
61 Columbia Street
Suite 300
Albany, New York 12210

JAMES D. LINNAN, ESQ.

CHRISTIAN F. HUMMEL
U.S. MAGISTRATE JUDGE
MEMORANDUM-DECISION AND ORDER
Presently pending before the Court is the Receiver’s report regarding the recommended
disposition of the David L. and Lynn A. Smith Irrevocable Trust U/A/ 8/04/04 (“the Trust”)

property located on Sacandaga Lake1. Dkt. No. 604. The Trust objects to the Receiver’s
conclusion to sell the property. Dkt. No. 626. The plaintiff, Securities and Exchange
Commission (“SEC”), joins in the Receiver’s recommendation. Dkt. No. 624. For the
reasons articulated below, the Court also agrees with the Receiver’s proposition to sell the
property and directs the Receiver to move forward with the sale accordingly.

I. Background
For a more complete description of the background of this action, see S.E.C. v.
McGinn, Smith & Co., 2011 WL 1770472 (N.D.N.Y. May 9, 2011) (district court’s decision
denying motions to dismiss of certain defendants); S.E.C. v. Wojeski, 752 F. Supp. 2d 220
(N.D.N.Y. 2010) (reconsidering prior asset freeze order and subsequently modifying said
order to include the Trust) aff’d 422 Fed. App’x 10 (2d Cir. 2011); S.E.C. v. Smith, 710 F.3d
87, 98 (2d Cir. 2013) (remanding, while not disturbing the district court’s previous ruling
providing for the sale of the Sacandaga property, back to the district court for further
direction to the Receiver); S.E.C. v. McGinn, Smith & Co., No. 10-CV-457, MemorandumDecision and Order (Sept. 11, 2013) (“MDO I”) (Dkt. No. 592) (denying the Trust’s motion to
vacate the sale of the Sacandaga property).
As relevant to the present motion, the undersigned directed that:
Consistent with the holding from Smith V, the Court recognizes that
“certain findings” should be determined including (1) the market
value of the property; (2) expectations that the market for the
property will improve in the foreseeable future; (3) whether the
property is being maintained and whether additional debts are

1

“The Property consists of three parcels of real property aggregating approximately
1.41 acres. Two of the parcels are improved by three seasonal residences (one main
house and two cottages).” Dkt. No. 604 at 3-4. The main house has beach and lake
access, while both cottages do not. Id. at 4.
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being incurred; (4) whether the equity in the property will be
preserved; and (5) whether the value of the property will appreciate
significantly to compensate for the expenses being incurred. 653
F.3d at 128-29. Given that information was not previously
submitted to the Court to make such determinations, the Receiver
is directed to evaluate these five topics, as well as any other areas
of consideration he deems relevant given his expertise2, and
determine whether selling or renting the property, or a combination
of both, will maximize its value. The Receiver should present his
conclusions to the Court via a written report. The parties will then
be afforded an opportunity to file written objections to the
Receiver’s report. The Court will then consider all submissions and
make a finding consistent with maximizing the property’s value,
directing the Receiver to proceed with that plan.
MDO I at 10. Pursuant to the Court’s direction, on October 10, 2013 the Receiver filed his
report. Dkt. No. 604. After (1) performing due diligence and reviewing public information
and documentation regarding the Trust and its beneficiaries’ interests; (2) site visits; (3)
communication and consultation with a real estate broker, an appraiser, the Trust’s trustee
and David and Lynn Smith; and (4) relying on his experience in real estate and with that
property in particular, “the Receiver conclude[d] that a sale of the Property is the best
course of action . . . .” Id. at 3, 5. In making that conclusion, the Receiver provided the
undersigned with appraisals, real estate comparisons, and budgets for the property, both
accounting for its rental and its non-rental. Id. at 6-8; Id., Exs. C, D.3
Going through the five topics requested by the Court in MDO I, the Receiver concluded
that (1) the market value of the property is not properly reflected by the conveyance
between the Trust and Lynn Smith because it “was not an arms-length transaction;” (2) the

2

The Receiver has already outlined his expertise in real estate sales in conjunction
with Smith III. 2011 WL 9528138, at *4 (citing Brown Decl. (Dkt. No. 222-3) ¶ 3).
3

Given the confidential nature of the material discussed and disclosed in
conjunction with formulating his opinion and creating a status report for the Court, such
information, specifically the values associated with the appraisal, budgets, expenses, and
income figures, are filed under seal. Dkt. No. 603.
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market prices on Sacandaga Lake are stable, thus “the Receiver agrees that the likelihood
of a successful sale has increased for a Sacandaga Lake property which is properly priced;”
(3) the property is beginning to show signs of wear which will increase the cost of
maintaining the property, on top of the fixed annual expenses such as property taxes and
utilities; (4) “under no circumstances will the current equity in the Property (including [the] . .
. Trust cash) be preserved even if the value of the Property does not depreciate;” and (5)
“[t]he value of the Property is not likely to appreciate in any material amount to compensate
for the rental or non-rental expenses to be incurred.” Dkt. No. 604 at 8-11. The Receiver
explained that rental of the property was not indicated because of (1) the inability or
difficulty to retain a responsible rental agent; (2) the lack of a historical ability to rent the
property4; (3) the risk of increased damage to the structures, as well as additional wear and
tear to the properties, and concomitant rise in insurance premiums; and (4) complications
with Lynn Smith’s claimed ownership of the furnishings, art, and equipment in the
properties. Id. at 7-8, 11-12. Ultimately, the Receiver concluded that “[t]here is no
economic justification to continue current ownership of the Property [adding that such] . . .
would also be contrary to the Receiver’s duties to maximize recoveries for the defrauded
investors.” Id. at 11.
The Trust objects to the Receiver’s recommendation, stating that the recommendations

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There is a factual inconsistency with regard to the ability to rent the property. In
defendant/intervenor Geoffrey R. Smith’s affidavit (Dkt. No. 626-1) it indicates that the
Smith family “was able to secure[] tenants for the full rental seasons during the period
from 1983 to 1998,” and that he had “already received [four] requests from friends eager
to rent the property for this coming season . . . [including a] request . . . from a family of
[twelve] that has contacted [him] to inquire into renting all [three] dwellings over Memorial
Day weekend.” G. Smith Aff. ¶¶ 13, 14. However, the Receiver indicated that Lynn
“Smith told [him] in response to a direct question that the property had not been rented.”
Dkt. No. 632 at 2. The undersigned finds the statements of the Receiver more credible in
this instance.
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are disingenuous as they are not in the best interest of the Trust and the appraisal of the
property and proposed sale price are too low, citing instead the previous sale price paid by
the Trust as the correct listing price with which to move forward. Dkt. No. 626.
The SEC responded, supporting the Receiver’s recommendation and deeming the
situation comparable to the prior sale of the Vero Beach house in Florida. Dkt. No. 624.
The Receiver also filed a reply in response to the Trust’s objections. Dkt. No. 632. This
letter explained why the valuation of the Sacandaga Property was correct, specifically
explaining the appropriateness of the sale price of a neighboring property which the Trust
contends was priced too low and should not have been considered by the Receiver. Id. at
1. Additionally, the Receiver allayed concerns about listing the property in the fall and
winter, stating that “[s]ophisticated buyers want to view lake property when the lake level is
low so that they can determined whether the property elevation leading to the beach and . .
. lake is level and whether the lake is sandy or stony.” Id. at 1-2. Lastly, the Receiver
discussed the Property’s rental history, as well as amending the purported costs associated
with caring for the Property throughout the winter. Id. at 2.

II. Analysis
To the extent that the Trust is proffering arguments which ultimately relate to the
appropriateness of the Court’s prior Decision and Order sanctioning Lynn Smith and
requiring the sale of the Sacandaga Lake Property, such arguments will not be further
contemplated as they have been articulated, analyzed at length in the prior opinions of the
Court, and ultimately upheld. Further, to the extent that the Trust is contending that it has a
special priority over the investors by way of either the beneficiaries’ personal ties to the
property or their status as victims of a different sort than the investors, these arguments
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also fail. As has been previously discussed by the Court,
it is the Trust, not the Smith children, which owns the property.
Having opted for the benefits of ownership by the Trust rather than
themselves, the children cannot now assert a harm to any
cognizable ownership or property interest. Moreover, the Trust’s
financial interest in the property, its only cognizable interest here, is
identical to that of the [R]eceiver – to avoid dissipation of the value
of the property and to realize the maximum return on that value.
S.E.C. v. Smith et al., No. 10-CV-457, Memorandum-Decision and Order (N.D.N.Y. Oct. 6,
2011).
The present and sole focus of this opinion centers around the Second Circuit’s
mandate specifically directing the Court to provide more direction to the Receiver regarding
the disposition of the Sacandaga Lake Property. In order to comply with that mandate, the
undersigned asked the Receiver to provide the Court with an informed opinion
recommending a course of action regarding the property while taking into consideration
various enumerated factors. MDO I, at 10. The Receiver has provided the undersigned
with such.
The Receiver reported that without renting the property, the actual annual expenses are
approximately $20,000. Dkt. No. 604 at 6. Moreover, capital repairs were conducted in
2013 which added approximately $6,500 in additional expenses for the property and the
Receiver expects to pay another $3,000 for capital improvements in 2014. Id. at 7. Even
with renting, the Receiver still projects a negative cash flow of over $9,000. Id. Similar to
the Vero Beach house, the undersigned agrees with the Receiver that the property is liable
to deterioration and that its continued possession fails to represent a financially responsible
solution given the actual and projected figures provided by the Receiver. Smith v. S.E.C.,
653 F.3d 121, 129 (2d Cir. 2011) (upholding liquidation of the Vero Beach home “in light of
its declining value and the diminishing equity in the property.”) (citations omitted).
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Moreover, the rental of the property will not provide for adequate income to both pay for the
fixed annual expenses of the property and ensure the continued financial health of the
property as an investment piece. Accordingly, as the Second Circuit previously held with
respect to the Vero Beach property, pursuant to “the district court’s broad equitable power
to fashion ancillary relief when its jurisdiction under those laws has been involved,” in
combination with the projected loss in capital associated with the property as either an
investment piece or rental property, a direction to sell the Sacandaga Lake Property is
appropriate. Id. at 128-29.

III. Conclusion
For the reasons stated above, it is hereby ORDERED that the Receiver may proceed
with the sale of the Sacandaga Lake Property pursuant to the report filed with the Court
(Dkt. No. 604).

SO ORDERED.
Dated: November 22, 2013
Albany, NY

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